Net Interest Income (NII)
What it is:
Net interest income is the difference between interest received from assets and interest paid on liabilities.
How it works (Example):
The formula for net interest income is:
Net Interest Income = Interest Received - Interest Paid
Let's assume XYZ Bank earns $1,000,000 for the month on its mortgage loans, commercial loans, and personal loans. It also pays $975,000 in interest to its depositors for their CDs, checking accounts, and savings vehicles. Using the formula above, XYZ Bank's net interest income is:
Net Interest Income = $1,000,000 - $975,000 = $25,000
Why it Matters:
In regard to banks, net interest income should go up as the yield curve steepens (long-term rates rise faster than short-term rates) because the bank is able to pay depositors a relatively low rate, but it can charge its borrowers a higher rate.